Friday, September 2, 2016

Banking Globalization and its Discontents

Banking Globalization and its Discontents 

Globalization is here to stay and its numerous upsides are undeniable for an economy such as ours. The business process outsourcing (BPO) industry that had ratcheted up and provided much needed employment during the incumbency of former president Gloria Arroyo is a clear example. So also is our contribution to the global telecommunications industry as we churn out microchips and assemble even the simplest gadgets from light switches to cheap digital wristwatches.

Globalization's impositions can however go the other way and the instances of these negativities are legion spawning such profound passions as those behind the various "Occupy Wall Street" movements and its downstream resurrections.

The debate on globalized financial services is however even more one-sided and the divergences are more pronounced. Allow us to analyze the impact of banking globalization as the issues there continue to intrude into our economy both positively and negatively.

Under the Basel III accords - agreements reached by a coterie of central bankers and regulators who oversee the global financial system, all sitting comfortably in high-backed leather chairs enjoyed among the Swiss Alps far from rural Philippines - certain minimum capitalization requirements have been imposed on various financial institutions and banks with the objective of shoring up capital bases and making these resilient to domestic and global shocks. The principle is simple. The larger the capital base, the more stable an institution might be. Bigger is better.

Unfortunately, bigger also means more money. Not just any kind from anyone. It requires capital infused from equity holders. While the Basel III accords allow for incremental Tier II capital from the liability column of a bank's balance sheets, these, with deferred and accrued expenses, must be sufficiently long term in nature as to have the characteristics of unsettled equity.

Never mind domestic realities and the relatively limited local capacities of resident Filipino investors and their scarce sources of capital. The Basel III perspective is global and because it is dominated by central bankers in far more advanced economies, the easing of domestic ownership requirements in banks and financial institutions plus incentives to merge and conglomerate have become priorities.

Allow us to analyze banking globalization from the perspective of discontents. That is patently unfair, we know. The darker view is however important from where we stand especially for international regulators focused on the financial stability of institutions more than spreading financial inclusion among those that need it the most. 

Because of the minimum capitalization requirements mandated by the Basel accords there is a danger that financial inclusion in the country will shift from regulated financial intermediaries subject to regular and periodic external audits to those loosely regulated. 

This presents a double whammy on the economy. On one side is the reduction in regulated financial inclusion. On the other side, a proliferation of predatory financial services.

Let's flesh this out.

As rural and thrift banks that cater to farmers and fisherfolk find themselves undercapitalized by the Basel requirements, they fall into disfavor among regulators. We see this happening today. Smaller financial intermediaries are gradually disappearing. Where once we had over five hundred rural banks we now have a tad over half of that. Among the survivors almost all are working to sell out to a larger commercial or universal bank as the latter seeks to expand its rural portfolios by quickly inheriting agricultural credit clients, or are simply albeit aggressively entering the high-margin small to medium scale lending sector via the quickest route. 

As each of these options are aggressively taken the downsides become obvious where the traditional debtors and their creditworthiness are concerned. As low net worth borrowers increasingly fall below higher credit standards they may be compelled to seek shadow banks and other less regulated financial intermediaries. Once this happens over all systemic risk inadvertently rises. While legal, shadow banks are not nearly half as regulated as are mainstream banks.

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